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ManufacturingAdobe Scan May 08, 2024
ManufacturingAdobe Scan May 08, 2024
A firm that manufactures its own products for sale will normally prepare a manufacturing
account to determine its production costs for cach accounting period. Production costs are sub
divided into two main groups: direct costs and indirect costs. Direct costs are traceable to each
unit (or batch of units) being manufactured. Indirect costs, on the other hand, are not traceable to
cach unit being manufactured, though they occur in the factory.
DIRECT COSTS
2. Direct labour: wages paid to workers who are directly involved in the actual production
process (i.e. Wages paid to production workers), Direct labour may be shown as:
Direct wages
º Production wages
> Manufacturing wages
> Factory wages
> Wages of machine operators
> Indirect labour (wages and salaries paid to factory cleaners, crane drivers, fork-ift
truck drivers, factory foreman, factory supervisors , factory managers)
> Rent, rates, insurance, etc., of factory
> Light, heat , gas, fuel, petrol, oil and lubricants (of factory)
> General factory expenses
> Depreciation of plant, machinery and factory equipment
Repairs and maintenance of factory buildings and equipment
TRADING ACCOUNT
This deals exclusively with finished goods. The production cost of goods completed, when
determined, should be transferred to the trading account, where it will replace purchases. Since
the firm will be manufacturing its own products, there will not normally be purchases of finished
goods. However, where enough units are not produced, the firm might decide to purchase
additional finished goods, rather than try to make them, since production will take some time to
be completed. In this case, the trading account will contain a figure for production cost and
another for purchases of finished goods.
PROFITAND LOSS ACCOUNT
Purchases
Add: Carriage and Freight Charges XXX
Import Duties
XX
Less Return Outwards/Purchases Returns
Net Purchases XX
Cost of raw material available for use XX
PRIMSE COST XX
FACTORY OVERHEADS:
Rent, Rates and Insurance XX
Light, Heat, Fuel XX
TutorialNotes:
1. The manufacturing account is also called a Schedule of Cost of Goods Manufactured.
2. Where the manufacturing account is prepared HORIZONTALLY, all the above items
would simple be shown on the DEBIT SIDE.
3. Prime Cost sometime involves only Raw Materials Consumed and Direct Labour.
4. Where necessary, adjustments should be made for accruals and prepayments (whether in
the manufacturing account or the trading and profit and loss account).
John Brown
TURNOVER:
Sales XX
XX
Opening Sock XX
Production Cost XX
GROSS PROFIT/(LOSS) XX
XX
LESS EXPENSES
Delivery Expenses XX
Administration:
Office Salaries XX
Financial Charges:
Loan Interest/ Interest on Overdraft XX
Bank Charges XX
Discounts Allowed XX XX
XX
The following details were extracted from the books of Horizon Enterprise, a block
manufacturer, on September 30, 2013:
Direct Labour:
Factory Overheads:
Sales 35 000
(C)
Production Cost per Unit = Total Production Cost
Number of Units Produced
=$22 000
1250
=$17.60 per block.
Tutorial Notes:
1. A manufacturing fim willrarely buy finished goods, since it is making its
own products. As such, questions may not necessarily contain purchases of
finished goods.
2. Itis only necessary to categorize the expenses if the question requires this.
3. There may be other income (additional revenues) to be added with gross
profit before the net profit (or loss) is calculated.
PRACTICE EXECERCISE
Innovations Ltd. Sells cellular phoncs, some of which they produce themselves and some
of which they buy for resale. The following information was taken from their records for
the year ended December 31, 2013.
OTHER INFORMATION: